If your fixed term is ending soon, now is the time to review your options to bag a competitive deal on your home loan.
When your fixed rate term ends, your loan will usually revert to your lender’s standard variable interest rate. Switching to a variable interest rate will happen automatically after your fixed rate expires, so it will likely not have fees attached or require you to complete any paperwork but may not be the best interest rate on offer. It is also not your only option.
Most lenders have three options for when your fixed rate ends:
- Roll onto their variable rate
- Re-fix
- Split rate
Review your home loan
About three months before your fixed rate ends, talk to your mortgage broker about what your new, or roll-off, interest rate and repayments might be and what your options are.
When reviewing your loan some things to take into consideration are:
- your circumstances
- the market
- your loan
Variable vs Fixed vs Split rate
There are benefits and drawbacks to both fixed rate and variable loans that are with considering when evaluating your options as what is the best loan for you depends on your current situation and future plans. A fixed rate loan generally gives you more certainty, while a variable loan could provide more flexibility.
Lenders won’t extend your fixed rate term, but they can offer a new fixed rate offer and term. Shop around as your current lender may not have the most competitive rate on the market but might be willing to match another lender’s rate. This can be done at any time after your fixed rate expires, but if you don’t want to automatically roll onto the standard variable rate make sure to get in touch with your lender before your fixed rate term expires.
You can generally choose to re-fix your entire loan balance or a portion of it, known as a split rate home loan. Split rate loans offer the benefits of both a fixed rate and variable loan as a portion of your loan is charged interest at a fixed rate, while the rest is charged interest at a variable rate.
Refinancing
Once your fixed rate term ends, you also have the option to refinance.
Say you have a $500,000 loan with a monthly repayment of $3,354.86 and your current fixed rate rolled into 6.40%, you could pay an additional $506,958 in interest and fees over a 25-year loan period. If you were to refinance this same $500,000 loan to a new rate of 5.84% with refinance costs of approximately $1,500 and keeping the same repayment amount, you could save $108,058 over the same 25-year period.
While the interest rate is a key factor when choosing a loan product, it’s important to know the ‘true cost of switching’ behind the tempting cashback offers or lower rates advertised. There are a myriad of fees and charges involved in setting up a new loan that you will need to consider, for example, if your loan-to-value ratio (LVR) is above a certain limit – usually 80% LVR – you may be required to pay Lenders Mortgage Insurance if your refinance.
The Lending Team at Prosperity can help you understand what option is best for you and your circumstances. Speak to our Senior Lending Adviser Melanie Peter on 1300 795 515 or email mpeter@prosperity.com.au.